Home from college for Christmas, my son informed me on Saturday night that Franz Kafka was an accomplished insurance lawyer before he was a writer. Granted insurance lawyer is not the same as securities lawyer, but it will have to do. It is close enough. If true, this information from my son makes the hopelessly cryptic suddenly clear. I understand now that from Kafka's perspective a human being really can metamorphose into a bug. But still this doesn't explain precisely how it happens. For that we actually need to see a thing change into something else entirely. The Sarbanes-Oxley Act and the SEC's rulemaking spasm give us this opportunity.

About your "Implementation of Standards of Professional Conduct for Attorneys" proposal, Release No. 34-46868, I have no objection. I think there is much about the Sarbanes-Oxley Act to object to, but what is the point? The SEC is only dutifully carrying out the orders given to itself by itself through the intercession of Congress and the Sarbanes-Oxley Act. The effort to improve upon the SEC's proposal is not worth the marginal return, with so little margin for return to begin with. Lawyers should be held accountable, just as everyone else can be. When disclosures go bad, lawyers usually have a role in it, sometimes a central role. So fine, lay on some new rules about lawyers.

The thing is, I've known a lot of securities lawyers, a lot of accountants, and a lot of executives, and I can count on one hand the number of crooked ones I've met. I am struggling to think of one occasion when I've seen a lawyer turn a blind eye to faulty disclosure, and I honestly can't think of one. Likewise, I can't think of an occasion when I've seen an accountant do that either. No one can deny that these things do happen, of course, and when they do the people who need to be punished should be punished. No argument about that. And lawyers, securities lawyers, electricians, cake deliverers, bus drivers etc., have their faults. We all do. No argument about that either.

So hold lawyers to account, and that is fine. I guess my sentiment is that the SEC, particularly its Division of Corporation Finance, has turned a blind eye to bad disclosure, but rather than being held responsible it is rewarded with the opportunity to slather on an elaborate new scheme of "302 certifications" and "906 certifications" and financial expert certifications and code of conduct certifications, and "disclosure controls and procedures," and reporting up the chain of command of nonfeasance, misfeasance, malfeasance, and really heinous feasance, and so on. The list goes on and on and it will only get longer, and you can actually consider this a continuation of a pattern that goes at least as far back as Regulation FD, which merely affirms that something that already was illegal is still illegal, and that abomination Rule 10b5-1, a groaning abyss of paper-shuffling mischief. But Rule 10b5-1 and Reg. FD are pikers by comparison to the Sarbanes-Oxley Act of 2002. The lunatic demons that skulked around Congress when the short-swing trading prohibition became law in 1934 stirred again in the summer of 2002. I can almost see them passing high-fives back and forth even now.

What will the SEC do when it becomes clear that this latest eruption of rules and certifications and formulaic disclosures and rigidly choreographed processes is not effective? What does this do for one case I know of - a very small public company with equity securities registered under section 12(g) of the Securities Exchange Act of 1934, which hasn't filed a Form 10-Q since 2000, hasn't filed a proxy or information statement at least since EDGAR became operational in 1994, filed its Form 10-K for 2000 18 months late, its Form 10-K for 2001 six months late, hasn't asked shareholders to elect a board for at least eight years and possibly longer, and prepares financial statements in accordance with accounting principles the likes of which I've never seen before, but nevertheless has been unmolested by the SEC for all of these years (which, by the way, was tipped off about this at least as far back as 1994 and has done nothing about it)? A lot of good disclosure controls and procedures and 302 certifications are doing there. The company doesn't use lawyers. Or another case of a large company I know of, whose CEO and Chairman are systematically plundering the company with rapacious compensation programs for themselves, which naturally they have chosen not to disclose, among other important things their investing public and probably their accountants too have been deliberately kept in the dark about? Reporting up the chain of command would have been pointless. One of the things they've avoided disclosing is that the Chairman controls vastly more stock than he is willing to admit to, enough to ensure that he gets his way no matter what. Had I tipped the SEC off, it would have been very obvious who told. And I would have been fired. No matter. I got fired anyway back in 2000 for drafting disclosures that told what I felt to be the whole truth, but at least I don't have to worry about the dude hounding me and having my license revoked. Had it come to that, I have no doubt who would have won that contest. It would not have been me.

So perhaps there should be yet another new rule demanding that the SEC certify to itself that it too has controls and procedures in place to ensure that its job is done. And then if another disclosure collapse occurs, getting to the root of the problem will be a simple matter of gathering all constituencies's certifications together in one place and identifying which one is false. How hard can that be, right? The point is that it might be useful for the SEC to examine its own practices to see what it can do to make disclosures better. Is there general agreement that the SEC is doing everything it can and should do? Maybe there is, but if there is I'm not aware of it. How confident should we be that the SEC's triennial drive-by reviews of public company filings will expose material information that would have remained hidden otherwise? Perhaps I'm naive. Perhaps it is understood that the drive-by review function is merely a technical checklist function.

If it were possible to start over from scratch, a better system might be one in which the SEC examines public companies randomly and periodically, just as bank examiners examine banks. There aren't vastly more public companies than there are banks, after all. And when you throw in thrifts and credit unions, all of which are examined intensively, financial institutions probably outnumber public companies, or come awful close. Examination of public companies would be expensive of course. But if you want to run with the big dogs, you've got to get off the porch. The SEC wouldn't have to examine every last public company. Just enough. And randomly enough that one would never know who's next. A surprise examination might be triggered by a tip from an insider who needs help exposing something rotten, or it might happen if the SEC gets wind of something on its own, or it might be truly random, or it might occur every now and then for no reason at all. If there are one thousand or so public company financial institutions and holding companies already, you've already got a huge head start. They are examined every eighteen months or every couple of years for safety and soundness. No need to cover the same ground the federal and state bank examiners have already covered and covered well.

If the SEC wants to get into the business of regulating lawyers, fine, but why not go all the way? Why not impose a licensing requirement on securities lawyers, so that only those holding an SEC license can submit a document for filing on behalf of a public company? Why not impose some standards? With a little creativity, this licensing device could be used to identify a pool of people the SEC could draw upon to conduct public company examinations on behalf of the SEC. Little disclosure commando teams led by accountants, with a lawyer or two and a financial analyst. I know it sounds ridiculous, but so what? It is merely due diligence, which accountants and lawyers and others have been doing for many years. It seems to me the current system of phrenological exams from a distance of public company filings doesn't work, and the grotesque bulge of new rules is not likely to make a difference, except to bury real problems deeper in a smoldering landfill of paperwork and procedures.

I thought the point of this exercise is to make disclosure better, not to replace disclosure with weird incantations about this, that, and the other thing. But I guess I see the SEC metamorphosing into something else entirely, leaving behind a lifeless husk that desperately seeks the missing rule that will, if adopted, make everything right again.